Cost distribution of a one cent state sales tax increase.

The South Dakota legislature is considering several bills that increase the state sales tax. How would an increase in sales tax impact South Dakotans of various income levels?

Analysis by the Institute on Taxation and Economic Policy (ITEP) conducted January of 2011 on South Dakota FY10 income and expenditure data estimates the impact of sales tax changes. See table below. The analysis estimates $161 million in new revenue would have been raised in FY10 had the state sales tax been 5 cents instead of 4 cents. Had groceries (except pop and candy) been exempt from the one cent increase, the estimated revenue gain would have been $147 million. If the current 4% sales tax on groceries (worth $57 million) were also removed the state would have netted around $90 million. Because purchases of goods subject to sales tax revenues have rebounded since the FY10, the actual net revenue gain for the state likely would be higher in FY12.

ITEPs analysis also highlights the “fairness” of an increase in state sales tax- comparing the additional taxes paid by different income groups both in nominal dollars and as a percentage of their total income. Households are grouped by income – lowest income 20%, second lowest 20%, middle 20%, fourth 20% and, for the highest 20%, further subdivided to next 15% , next 4% and top 1%. A one cent tax increase collects the greatest number of dollars from the top 1% of households by income, but collects the greatest percentage of available household income from the bottom 20% of households. Removing sales tax from groceries makes the tax increase less regressive, but also raises less new revenue.

As South Dakota’s Legislature considers bills raising sales taxes (HB 1222 & SB 174) and a bill to repeal the sales tax on food rebate program (SB 191) it is important to understand how sales tax changes impact South Dakotans of various income levels.